Section 185 of the Income-tax Act, 2025 — Cash Limit on Loans, Deposits and Specified Sums (₹20,000 Rule)

In plain language

Important scope note: Although this page sits under a "transfer-pricing" label, Section 185 of the Income-tax Act, 2025 does not deal with transfer pricing at all. Transfer pricing (associated enterprises, arm's length price, documentation) is covered separately in Chapter on international taxation. Section 185 is the re-enacted successor of the old Section 269SS of the Income-tax Act, 1961 — it restricts the acceptance of loans, deposits and "specified sums" in cash. We explain the provision as it actually reads, because accuracy matters more than the tag.

What Section 185 says in plain English

Section 185 tells you that no person may take or accept a loan, a deposit, or a "specified sum" of ₹20,000 or more in cash. Once the amount hits that threshold, the money must move only through traceable banking channels. The idea is simple: the tax department wants a bank trail behind every sizeable loan or deposit so that undisclosed cash cannot be dressed up as a "loan from a relative" or an "advance received".

• Loan or deposit: money borrowed or kept with you, repayable in cash or kind, with or without interest.
• Specified sum: any sum of money receivable, whether as an advance or otherwise, in relation to the transfer of an immovable property — even if the sale never goes through.

Permitted modes — how you MUST receive the money

• Account-payee cheque
• Account-payee bank draft
• Electronic clearing system through a bank account (ECS/NEFT/RTGS/IMPS/UPI)
• Other electronic modes as may be prescribed

Note the words "account payee". A bearer cheque or an ordinary crossed cheque is not enough — it must be account-payee so the money lands only in the payee's own bank account.

The three-part trigger — when the ₹20,000 limit bites

The limit is not judged on a single transaction alone. Section 185 aggregates. The banking mode becomes compulsory if any one of these is ₹20,000 or more:

• (a) the amount of the loan/deposit/specified sum being taken now; or
• (b) the amount of any earlier loan/deposit/specified sum from the same person still unpaid (the outstanding balance); or
• (c) the total of (a) and (b) taken together.

This anti-splitting rule stops people from breaking one big loan into many ₹19,000 cash slices.

Who is exempt

To keep genuine institutional and rural transactions out of the net, Section 185 does not apply where the loan/deposit is taken from or by:

• Government, any banking company, post office savings bank or co-operative bank;
• any corporation established by a Central, State or Provincial Act;
• any Government company; and
• notified institutions, associations or bodies.

A relaxed higher limit of ₹2,00,000 applies to deposits/loans between a primary agricultural credit society or a co-operative agricultural and rural development bank and its members. There is also relief where both parties have only agricultural income and neither has taxable income.

How it interacts with related sections

• Repayment side: a companion section (the 2025 Act's successor to the old Section 269T) restricts repaying loans/deposits of ₹20,000+ in cash.
• Penalty: breaching Section 185 attracts a penalty equal to 100% of the amount taken in cash (mirroring the old Section 271D). A separate penalty applies for cash repayments.
• Reasonable cause: the successor to Section 273B protects you — no penalty if you prove a genuine, reasonable cause (e.g. urgent night-time medical cash from a relative in a village with no bank).
• Distinct from cash-receipt cap: the ₹2,00,000 cash-receipt ceiling (old Section 269ST) is a separate rule; Section 185 targets loans and deposits specifically.

Practical implications

• Businesses accepting share application money, unsecured loans from directors, or booking advances for property must route everything through the bank.
• The penalty is on the recipient of the cash — so if you accept a cash loan, you (not the lender) pay the price.
• Journal-entry loans (squaring off balances without cash) are generally outside Section 185 because no cash "moves", but tribunals scrutinise them closely.